Tarullo Says Systemic-Risk Tag Falls Short With Shadow Banking

  • Insurance, pension funds unlikely to pose stability dangers
  • Fed to develop rule for haircuts on securities financing

Federal Reserve Governor Daniel Tarullo said the systemic-risk tag used by the Financial Stability Oversight Council isn’t the best way to supervise shadow banking activities.

The label used by the council of regulators to give the Fed oversight of companies including American International Group Inc. is “almost surely not the optimal regulatory approach for most activities that can be characterized as shadow banking,” Tarullo said in remarks prepared for a conference in Washington on Tuesday. “The vast majority of firms engaged in such activities will not satisfy the statutory test for designation.”

Tarullo, the Fed’s point man on regulatory matters, discussed the potential risks of nonbank activities.

“If enough pension plans fell short of expectations, there might be macroeconomic consequences,” he said. “But, in themselves, they are unlikely to pose financial stability risks. Similar reasoning would apply to traditional insurance activities."

The greatest risks to financial stability “are the funding runs and asset fire sales associated with reliance on short-term wholesale funding," he said.

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